1 / 13

Index Insurance

Index Insurance. In the absence of crop insurance, farmers are less likely to specialize in agriculture, more likely to grow multiple crops and less likely to add the optimal inputs these crops

fleur
Download Presentation

Index Insurance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Index Insurance • In the absence of crop insurance, farmers are less likely to specialize in agriculture, more likely to grow multiple crops and less likely to add the optimal inputs these crops • As a result, international groups such as the World Bank are interested in creating crop insurance coverage in developing countries • There is enormous interest in this topic outside the US

  2. An example of index insurance

  3. Index insurance does not require historic farm level yield data and does not expose the company to moral hazard or adverse selection • Losses are poolable on a global basis • This would eliminate the need for deep pocket reinsurers such as the US Federal Government • The first challenge is to link weather to a particular farm

  4. The simplest method sets the value of rainfall at out-of-sample locations equal to the rainfall recorded at the nearest observed site • Another method, estimates rainfall as a weighted average of surrounding observed values, in which the weights are inversely proportional to the squared distances from the unobserved site

  5. NOAA Data

  6. Krigingtechniques form a predictor that is equal to a weighted average of the data in the sample. The weights used in the average estimated from the data • Krigingtechniques have been shown to provide predictors that are both statistically unbiased and efficient • Kriging produces a smoothed rainfall surface, fit all existing data and which maintains the spatial correlation structure • IDW produces point estimates • The two methods provide similar values at each point

  7. Rates • Rainfall distributions were found to have a gamma distribution • Rain was then linked to yields using plant growth models so that the farmer could buy protection against a rain event that would trigger yield loss • Premium rates allowed the insurance company to break even over a 5,000 year period • Historic analysis over 60 years showed that the program would also have been fairly priced during that period

  8. Climate.com • Company sells index insurance in the US • Must compete against heavily subsidized competition, premium rates seem high • Recently began selling competing, subsidized products • May eventually ask for a subsidy • Enormous value in other countries • Monsanto purchase?

More Related